11/01/2004 @ 12:00AM

Capitalism's Amazing Resilience

Energy is one of the two leading risks in the global economy. (Terrorism, of course, is the other.) Just take a look at one industry already suffering from oil shock–U.S.-based airlines will lose $5 billion this year. That loss matches the bump in fuel prices. Ouch. Then there’s China, which has climbed to the world’s number two spot in oil consumption. China uses most of its oil wildly inefficiently to generate electricity. Oil consumption by cars barely registers–now. But during the next four years, China’s oil imports will double as the Chinese give up their bicycles. Biting your nails yet? Here’s one more sobering oil fact: The world has only a 1% short-term cushion. This makes for a very volatile market.

Given these facts, where will oil prices be a year from now–$75 a barrel? $100?

Wrong numbers, says Daniel Yergin. Wrong direction, too. Try $38. Yergin knows oil. He is a founder and the chairman of Cambridge Energy Research Associates, a consultancy that has 230 employees, with offices worldwide. He is also a recipient of the United States Energy Award and a member of the Secretary of Energy’s Advisory Board. A former Harvard professor, Yergin is best known for his Pulitzer Prize-winning book on oil, The Prize: The Epic Quest for Oil, Money and Power.

Yergin’s prediction of cheaper oil prices is noteworthy because he doesn’t dispute any of the alarming facts cited in my opening paragraph. Not that he would. The facts came straight from Yergin’s own mouth at the recent Forbes Global CEO Conference in Hong Kong. I jotted down Yergin’s comments while listening to him speak at a dinner. Then he gave a formal speech the next morning and, fueled this time by highly caffeinated tea, I again took notes, just to be sure. Yergin is pretty clear about his predictions. He says oil demand will rise, yet prices will drop. How can this be?

Answer: capitalism’s amazing resiliency. Oil prices rise–oilmen become innovative. They work, they invest, they put their heads to the task, they apply technology, and pretty soon they’ll discover how to extract oil profitably from oil sand. Or open wells in deeper water. Or scour the planet for new sources using scanners thousands of miles in space. As Yergin reminds us, oil output is 60% higher today than it was in the 1970s. Not many sages from the 1970s would have bet their reputations on this development. The opposite sentiment prevailed back then; experts said the planet was running out of oil. Wrong.

Yergin says he’s always asked when oil will run out for good. He shrugs. He’s willing to say the world will need 40% more oil in 2025. Hard work and technology probably will find a way to meet the demand. The funniest thing–and I saw this happen–is that many people who ask Yergin this question are disappointed with his answer. It’s as if they want oil to run out.

Bubble Trouble

A month ago I spent a fine sunday morning flying low and slow along the Hudson River. Buckled into a four-seat Grumman Tiger, we took off from White Plains, N.Y., climbed to 1,500 feet and leveled out, banked over the Tappan Zee Bridge and followed the river heading north. Since FORBES photographer Glen Davis was piloting, I had the easy job of looking out the window. We tracked the river as it slithered around jutting bluffs near West Point. Below was Michie Stadium, where the day before the Army football team had nearly won a game, which would have snapped an 18-game losing streak. North of West Point orange-colored leaves dotted the trees with greater frequency.

Glen landed the Tiger at Sky Acres Airport south of Millbrook, N.Y., just hard by the Massachusetts border. At the Latitude 44 North airport cafe we ordered a delicious greasy breakfast of eggs, pancakes, bacon, orange juice and coffee for about five bucks apiece. Room-service Wheaties, berries and tea had cost me six times that at my midtown Manhattan hotel.

Manhattan prices! The day before another pal had guessed that his three-story brownstone, of modest size but situated a tee shot off Central Park in the 80s, would fetch $5 million on today’s hot market. He’d paid $1 million for it 14 years ago. Everybody in his New York circle of friends had a story like that, he said.

Finishing my coffee at the Sky Acres Airport, I wondered what $5 million could buy around Millbrook. An estate with horse barns on 20 acres? Turning the question around, how much money would it take in Millbrook to match my pal’s living conditions on the Upper West Side–a quarter-million?

Doubtless this thread of thinking is why Trump is Trump and I’m writing editorials but one has to marvel at the incredible house-cost gap that exists today between America’s urban coasts and its small-city and rural interior. Especially in this age of broadband, cable TV and Starbucks, when you can get Jamaican coffee and Forbes.com in Smallville.

Hong Kong’s residential real estate market peaked in 1997. Five years later prices had dropped by 67%. (They have recovered but still remain 25% below the peak.) Los Angeles home prices fell 40% between 1988 and 1992 (but have tripled since). Could such price turbulence hit New York? At these inflatedlevels, don’t be surprised.